Digital gift cards offer convenience, and consumers often buy them to take advantage of discounts and credit card rewards. But redeeming e-gift cards can be a hassle, and merchants must be aware of the fraud risks.

Jared McClure, co-founder and chief operating officer, CrayPay

Like other digital payment methods, digital gift cards are gaining in popularity. For retailers, gift cards — physical or electronic — offer ways to engage with consumers. Alongside the popular features of plastic gift cards, the digital version also offers convenience and availability. With a few taps on their phones, buyers can instantly send gifts to their hard-to-buy-for friends who live out of state.

Yet gift-giving isn’t what’s driving the uptick in digital gift card sales. Consumer self-interest is. In fact, Blackhawk Network found that a stunning 69 percent of consumers surveyed for its 2018 report are buying gift cards for their own use, reaping the benefits of discounts or credit card loyalty programs.

Some digital gift cards are designed only for smartphone use, while others can be used only in physical locations.

Beyond savings and convenience, merchants are fueling the increased consumer appetite by making it easier to purchase, spend, and even exchange gift cards online. The upside is faster, friction-free transactions for customers as mobile commerce sales continue to grow. But there are drawbacks for buyers, too.

The Hassle Factor

Purchasing digital gift cards is convenient for consumers, but redeeming them is less straightforward. Merchants rightfully define parameters for gift card use, but consumers are usually unaware of an individual retailer’s quirks. For example, some digital cards are designed only for smartphone use, while others can’t be used in physical locations. And contrary to expectations for digital purchases, gift card processing isn’t always instant. In fact, until recently, some e-card purchases (including Amazon’s) could take up to two hours to get to the customer.

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Additionally, refunds for purchases made with gift cards are typically put back onto the gift card. That’s not what customers expect, and it can be a hassle for everyone.

Take the customer who bought a refrigerator from a home improvement store using $2,000 in gift cards she had purchased at a discount. When the refrigerator broke down within a month, she returned it and opted to purchase a replacement from a different store. However, the purchase was refunded in gift cards, not in cash. As a result, the customer had to come up with the money for another refrigerator while holding $2,000 in gift cards that could be spent only at a single store.

While not ideal, customers will likely overlook delivery delays and refunds issued in gift cards when the benefits outweigh the hassle. That’s not always the case because of potential security concerns.

The Fraud Factor

With every digital gift card purchase, buyers hand over valuable personal identifiers. This information — credit card numbers, email addresses, phone numbers, social media accounts — makes it easy for consumers to replace an e-gift card if they lose the redemption code. However, that same information becomes a target for scammers looking to steal gift cards. Worse, it makes it easier for thieves to steal a consumer’s identity.

Digital gift card use continues to rise steadily, so retailers need to take every possible step to prevent fraud. The point of purchase is your first line of defense. Consumers should make their online gift card purchases only through reputable merchants.

Strong “know your customer” methodologies are another way to bulk up security. You can deter fraud by tracking who purchases a digital gift card in real time and verifying that the payment source belongs to the purchaser. Other KYC tactics merchants can utilize in online gift card purchasing include multifactor authentication of both the buyer and his device, correlation of the device to the purchasing cardholder’s information, and comparison against past behavioral information about the purchaser.

Merchants should ensure that online gift cards are available through a secure server, and the “secure” lock symbol next to the “https” in the web address needs to be visible to customers. Purchase sites should also require strong passwords and encourage users — including gift recipients — to change passwords often to prevent fraud.

In the end, the convenience of digitally purchasing, delivering, and using a gift card means they are a fixture in the digital retail space. As vendors continue to enhance the customer experience, both consumers and merchants must be diligent to ensure that fraud prevention tactics keep pace.